QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2011

¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ___________

Commission File Number 000-32951

CRESCENT FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

NORTH CAROLINA

56-2259050

(State or other jurisdiction of Incorporation

(IRS Employer Identification Number)

or organization)

1005 HIGH HOUSE ROAD, CARY, NORTH CAROLINA

27513

(Address of principal executive offices)

(Zip Code)

(919) 460-7770

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $1.00 par value 9,664,059 shares outstanding as of May 12, 2011.

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

TABLE OF CONTENTS

Page No.

Part I.

FINANCIAL INFORMATION

Item 1 -

Financial Statements (Unaudited)

Consolidated Balance Sheets March 31, 2011 and December 31, 2010

3

Consolidated Statements of Operations Three Months Ended March 31, 2011 and 2010

4

Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, 2011 and 2010

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation

251,800

239,659

Provision for loan losses

7,023,511

1,801,177

Gain on mortgage loan commitments

(6,334

)

-

Net gain on sales of mortgage loans

(85,120

)

(44,200

)

Originations of mortgage loans held-for-sale

(11,843,128

)

(1,266,561

)

Proceeds from sales of mortgage loans

16,812,766

1,140,266

Amortization of core deposit premium

33,337

33,337

Deferred income taxes

31,529

(55,622

)

Gain on sale of available for sale securities

(100,631

)

-

Net loss on disposal of and valuation adjustments to - foreclosed assets

158,876

32,919

(Gain) loss on disposal of other assets

721

(7,000

)

Net amortization of premiums/discounts on securities

494,751

333,781

Accretion of loan discount

-

(416,958

)

Amortization of deposit premium

-

10,108

Net increase in cash value of life insurance

(194,142

)

(204,338

)

Stock based compensation

34,506

31,967

Change in assets and liabilities:

(Increase) decrease in accrued interest receivable

609,814

139,128

(Increase) decrease in other assets

3,293,624

(269,700

)

Increase (decrease) in accrued interest payable

(24,567

)

25,314

Increase in accrued expenses and other liabilities

138,215

141,587

TOTAL ADJUSTMENTS

16,629,528

1,664,864

NET CASH PROVIDED BY OPERATING ACTIVITIES

9,582,884

2,207,296

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of investment securities available for sale

(35,078,914

)

(1,009,241

)

Principal repayments of investment securities available for sale

7,534,704

6,454,830

Proceeds from sale of securities available for sale

20,445,655

-

Proceeds from disposal of foreclosed real estate

1,618,919

2,012,883

Proceeds from sale of loans

1,950,000

-

Net decrease in loans

17,461,008

8,819,668

Purchases of bank premises and equipment

(59,641

)

(380,962

)

NET CASH PROVIDED BY INVESTING ACTIVITIES

13,871,731

15,897,178

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase (decrease) in deposits:

Demand

(2,783,237

)

(5,620,279

)

Savings

(7,495,661

)

3,807,760

Money market and NOW

9,683,021

16,707,537

Time deposits

1,417,749

(23,782,593

)

Net decrease in short-term borrowings

(2,000,000

)

(17,000,000

)

Net increase (decrease) in long-term borrowings

(5,000,000

)

3,000,000

Dividends paid on preferred stock

-

(311,250

)

NET CASH USED BY FINANCING ACTIVITIES

(6,178,128

)

(23,198,825

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

17,276,487

(5,094,351

)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

49,106,179

31,727,108

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

66,382,666

$

26,632,757

See accompanying notes.

- 7 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE A - BASIS OF PRESENTATION

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three month periods ended March 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America. The financial statements include the accounts of Crescent Financial Corporation (the “Company”, “we”, “our”, “Crescent”) and its wholly owned subsidiary, Crescent State Bank (the “Bank”). All significant inter-company transactions and balances are eliminated in consolidation. Operating results for the three month period ended March 31, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2010 annual report on Form 10-K. This quarterly report should be read in conjunction with such annual report.

NOTE B – COMMITMENTS

At March 31, 2011, commitments are as follows:

Undisbursed lines of credit

$

33,281,040

Commitments to extend credit

90,919,792

Stand-by letters of credit

3,707,959

Commitments to sell loans held for sale

805,334

Commitments to purchase investment securities

2,190,333

Undisbursed commitment to purchase additional investment in Small Business Investment Corporation

363,000

NOTE C - PER SHARE RESULTS

Basic earnings per share represents income (loss) available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options, restricted stock and the common stock warrant issued to the US Treasury and are determined using the treasury stock method.

Three Months Ended

March 31

2011

2010

Weighted average number of shares used in computing basic net income per share

9,581,390

9,574,264

Effect of dilutive stock options

-

13,484

Weighted average number of shares used in computing diluted net income per share

9,581,390

9,587,748

- 8 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE C - PER SHARE RESULTS (Continued)

For the three month period ended March 31, 2011, there were 296,611 options and the warrant for 833,705 shares that were anti-dilutive as the average stock price was below the exercise price, and 3,000 options that were anti-dilutive due to the net loss. For the three month period ended March 31, 2010, there were 426,111 options and the warrant for 833,705 shares that were anti-dilutive as the average stock price was below the exercise price.

NOTE D - INVESTMENT SECURITIES

The following is a summary of the securities portfolio by major classification. All mortgage-backed securities and collateralized mortgage obligations represent securities issued by a government sponsored enterprise (i.e. Government National Mortgage Association, Federal Home Loan Mortgage Corporation or Federal National Mortgage Association) where the underlying collateral consists of conforming residential home mortgage loans.

March 31, 2011

Gross

Gross

Amortized

unrealized

unrealized

Fair

cost

gains

losses

value

Securities available for sale:

U.S. government securities and obligations of U.S. government agencies

$

10,512,100

$

440,565

$

7,713

$

10,944,952

Mortgage-backed securities

32,972,287

1,322,532

99,004

34,195,815

Collateralized mortgage obligations

91,416,870

1,706,516

183,322

92,940,064

Municipals, non-taxable

44,797,358

440,209

693,096

44,544,471

Municipals, taxable

2,032,407

-

30,167

2,002,240

Corporate bonds

2,787,869

70,101

-

2,857,970

Marketable equity

451,368

96,656

37,120

510,904

$

184,970,259

$

4,076,579

$

1,050,422

$

187,966,416

December 31, 2010

Gross

Gross

Amortized

unrealized

unrealized

Fair

cost

gains

losses

value

Securities available for sale:

U.S. government securities and obligations of U.S. government agencies

$

9,346,395

$

492,005

$

-

$

9,838,400

Mortgage-backed securities

38,079,632

1,667,631

22,418

39,724,845

Collateralized mortgage obligations

76,553,621

2,022,287

126,224

78,449,684

Municipals

51,067,962

442,604

892,203

50,618,363

Corporate bonds

2,777,457

15,665

24,322

2,768,800

Marketable equity

440,757

121,082

45,702

516,137

$

178,265,824

$

4,761,274

$

1,110,869

$

181,916,229

- 9 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE D - INVESTMENT SECURITIES (Continued)

The following tables show investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010. The March 31, 2011 unrealized losses on investment securities relate to two US Government agencies, fourteen collateralized mortgage obligations, four mortgage-backed security, twenty-four non-taxable municipal securities, two taxable municipal securities and one marketable security. The December 31, 2010 unrealized losses on investment securities relate to seven collateralized mortgage obligations, one mortgage-backed security, thirty-six municipal securities, two corporate bonds and one marketable equity security. The unrealized losses relate to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized losses will reverse at maturity or prior to maturity if market interest rates decline to levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.

March 31, 2011

Less Than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

value

losses

value

losses

value

losses

Securities available for sale:

US Government securities

$

2,000,040

$

7,713

$

-

$

-

$

2,000,040

$

7,713

Mortgage-backed

7,532,432

99,004

-

-

7,532,432

99,004

Collateralized mortgage obligations

18,047,471

183,322

-

-

18,047,471

183,322

Municipals, non-taxable

19,433,720

693,096

-

-

19,433,720

693,096

Municipals, taxable

2,002,240

30,167

-

-

2,002,240

30,167

Marketable equity

-

-

44,704

37,120

44,704

37,120

Total temporarily impaired securities

$

49,015,903

$

1,013,302

$

44,704

$

37,120

$

49,060,607

$

1,050,422

December 31, 2010

Less Than 12 Months

12 Months or More

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

value

losses

value

losses

value

losses

Securities available for sale:

Mortgage-backed

$

984,306

$

22,418

$

-

$

-

$

984,306

$

22,418

Collateralized mortgage obligations

7,274,222

126,224

-

-

7,274,222

126,224

Municipals

27,738,632

823,580

1,006,202

68,623

28,744,834

892,203

Corporate bonds

1,831,230

24,322

-

-

1,831,230

24,322

Marketable equity

-

-

36,122

45,702

36,122

45,702

Total temporarily impaired securities

$

37,828,390

$

996,544

$

1,042,324

$

114,325

$

38,870,714

$

1,110,869

- 10 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE D - INVESTMENT SECURITIES (Continued)

At March 31, 2011 and December 31, 2010, investment securities with a carrying value of $98,104,548 and $94,085,409 respectively, were pledged to secure public deposits, borrowings and for other purposes required or permitted by law.

The amortized cost and fair values of securities available for sale at March 31, 2011 are shown below by expected maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Amortized

Fair

cost

value

Due within one year

$

26,862,850

$

27,593,246

Due after one year through five years

98,499,914

100,827,723

Due after five years through ten years

33,753,056

33,797,349

Due after ten years

25,403,071

25,267,194

Other equity securities

451,368

510,904

$

184,970,259

$

187,996,416

At March 31, 2011, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Company is $10,521,700. After a period of suspended dividends the FHLB of Atlanta has declared and paid an annualized dividend for the fourth quarter of 2009 and the all four quarters of 2010 of 0.27%, 0.26%, 0.44%, 0.39% and 0.79%, respectively. On June 30, 2010 it was announced that the FHLB would resume repurchasing activity-based excess capital stock held by members, on a limited basis. Share repurchases were made on July 15, 2010, August 17, 2010 and November 15, 2010 for 4,237, 4,200 and 4,111 shares, respectively, with an additional 4,292 shares to scheduled to be repurchased April 8, 2011. The repurchase of excess capital stock is subject to the FHLB continuing to meet all applicable statutory and regulatory conditions for an excess stock repurchase and all other conditions provided in the FHLB’s Capital Plan. The FHLB will continue to evaluate on a quarterly basis whether to repurchase membership-based excess stock. Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of March 31, 2011 or December 31, 2010. Further, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the FHLB stock held by the Company.

NOTE E - LOANS HELD FOR INVESTMENT

Following is a summary of loans for the period indicated:

March 31, 2011

December 31, 2010

Real estate - commercial

$

336,006,020

$

345,902,319

Real estate - residential

82,069,448

81,644,508

Construction loans

133,069,646

140,848,750

Commercial and industrial loans

43,697,294

48,144,401

Home equity loans and lines of credit

54,927,058

57,125,274

Loans to individuals

3,680,878

3,838,154

Total loans

653,450,344

677,503,406

Less:

Deferred loan fees

(667,045

)

(700,337

)

Allowance for loan losses

(23,485,000

)

(20,702,000

)

Total

$

629,298,299

$

656,101,069

- 11 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE E - LOANS HELD FOR INVESTMENT (Continued)

Loans are primarily made in the Company’s market area of North Carolina, principally Wake, Johnston, Lee, Moore, and New Hanover counties. Real estate loans can be affected by the condition of the local real estate market. Commercial and consumer and other loans can be affected by the local economic conditions.

To provide greater transparency on non-performing assets, disclosures required by ASU 2010-20 have been included below. Allowance for loan losses is reported by portfolio segment and further detail of credit quality indicators are provided by class of loans.

Allowance for Loan Losses and Recorded Investment in Loans

As of and for the quarter ended March 31, 2011 and as of December 31, 2010 (in thousands)

The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Management evaluates the adequacy of this allowance on a monthly basis during which time those loans that are identified as impaired are evaluated individually.

Following is an analysis of the allowance for loan losses by loan segment:

March 31, 2011

Commercial

Commercial

Residential

Construction

& Industrial

Real Estate

Real Estate

Dev & Acq

Consumer

Total

Allowance for loan losses:

Beginning balance

$

2,689

$

5,345

$

2,814

$

9,774

$

80

$

20,702

Charge-offs

(269

)

(216

)

(339

)

(3,761

)

(14

)

(4,599

)

Recoveries

36

-

10

312

-

358

Provision

253

2,134

1,880

2,752

5

7,024

Ending balance

$

2,709

$

7,263

$

4,365

$

9,077

$

71

$

23,485

Ending balance:

Individually evaluated for impairment

$

1,298

$

3,575

$

2,475

$

6,636

$

35

$

14,019

Collectively evaluated for impairment

$

1,411

$

3,688

$

1,890

$

2,441

$

36

$

9,466

Loans:

Ending balance

$

43,697

$

336,006

$

136,996

$

133,070

$

3,681

$

653,450

Ending balance:

Individually evaluated for impairment

$

3,641

$

18,463

$

13,772

$

39,062

$

37

$

74,975

Collectively evaluated for impairment

$

40,056

$

317,543

$

123,224

$

94,008

$

3,644

$

578,475

- 12 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE E - LOANS HELD FOR INVESTMENT (Continued)

December 31, 2010

Commercial

Commercial

Residential

Construction

& Industrial

Real Estate

Real Estate

Dev & Acq

Consumer

Total

Allowance for loan losses:

Ending balance

$

2,689

$

5,345

$

2,813

$

9,775

$

80

$

20,702

Individually evaluated for impairment

$

1,094

$

1,780

$

882

$

7,272

$

10

$

11,038

Collectively evaluated for impairment

$

1,595

$

3,565

$

1,931

$

2,503

$

70

$

9,664

Loans:

Ending balance

$

48,144

$

345,903

$

138,729

$

140,889

$

3,838

$

677,503

Ending balance:

Individually evaluated for impairment

$

2,471

$

10,024

$

9,531

$

32,403

$

13

$

54,442

Collectively evaluated for impairment

$

45,673

$

335,879

$

129,198

$

108,486

$

3,825

$

623,061

Credit Quality Indicators

As of March 31, 2011 and December 31, 2010 (in thousands)

We use an internal grading system to assign the degree of inherent risk on each individual loan. The grade is initially assigned by the lending officer and reviewed by the loan administration function throughout the life of the loan. As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average grade of commercial loans, (ii) the level of classified commercial loans, (iii) charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the state of North Carolina. The credit grades have been defined as follows:

·

Risk Grade 1 - Minimal credit risk - A loan to a borrower of unquestionable financial strength. Financial information exhibits superior earnings, leverage and liquidity positions, which firmly establish a repayment source that is substantial in relation to debt. These borrowers would generally have access to national credit and equity markets. Also includes a loan fully protected by cash equivalents or high grade, readily marketable securities.

·

Risk Grade 2 – Modest credit risk - Loans to borrowers of better than average financial strength. Earnings performance is consistent and primary and secondary sources of repayment are well established. Borrower exhibits very good asset quality and liquidity with strong debt servicing capacity. Company management has depth, is experienced and well regarded in the industry. This risk grade is reserved for loans secured by readily marketable collateral or is a loan made within guidelines to borrowers with liquid financial statements.

- 13 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE E - LOANS HELD FOR INVESTMENT (Continued)

·

Risk Grade 3 – Average credit risk - Loans to borrowers involving satisfactory financial strength. Earnings performance is consistent with primary and secondary sources of repayment well defined and adequate to retire the debt in a timely and orderly fashion. These businesses would generally exhibit satisfactory asset quality and liquidity with moderate leverage, average performance to their peer group and experienced management in key positions. This risk grade is reserved for the Bank’s top quality loans.

·

Risk Grade 4 – Acceptable credit risk - Loans to borrowers with more than average risk but with little risk of ultimate collection. The loan may contain certain characteristics that require some supervision and attention by the lender. Asset quality is acceptable, but debt capacity is modest and little excess liquidity is available. The borrower may be fully leveraged, and unable to overcome major setbacks. Covenants are structured to ensure adequate protection. Management may have limited experience and depth. Includes loans, which are highly leveraged transactions due to regulatory constraints. Also includes loans involving reasonable exceptions to policy. This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection.

·

Risk Grade 5 – Acceptable credit risk - A loan that is sound yet ultimate collectability may depend on guarantor support or tertiary repayment sources. Although asset quality remains acceptable, the borrower has a smaller and/or less diverse asset base, very little liquidity and limited debt capacity. Earnings performance is inconsistent and the borrower may be highly leveraged and below average size or lower-tier competitor. Limited management experience and depth. May be well-conceived start-up venture, but repayment is still dependent upon a successful operation. Includes loans with significant documentation or policy exceptions, improper loan structure or inadequate loan servicing procedures. May also include a loan in which strong reliance for a secondary repayment source is placed on a guarantor who exhibits the ability and willingness to repay. These credits require significant supervision by the lender and covenants structured to ensure adequate protection. Loans which are highly leveraged transactions due to the obligor's financial status. This grade is given to acceptable loans that show signs of weakness in either sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss.

·

Risk Grade 6 – Special mention - Criticized Exposure. A loan which still has the capacity to perform but contains certain characteristics that require continual supervision and attention from the lender. These characteristics may include but are not limited to (1) adverse trends in financial condition or key operating, liquidity, trading asset turn, or leverage ratios; (2) inconsistent repayment performance; or (3) fatal documentation errors that would prevent the Bank from enforcing its note or security instruments. Material adverse trends have not yet been developed.

·

Risk Grade 7 – Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. A loan classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the collection of all payments contractually due the Bank upon liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

·

Risk Grade 8 – Doubtful - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

- 14 -

CRESCENT FINANCIAL CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

NOTE E - LOANS HELD FOR INVESTMENT (Continued)

·

Risk Grade 9 – Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that is not practical or desirable to defer writing off this worthless loan even though partial recovery may be affected in the future. Probable Loss portions of Doubtful assets are charged against the Allowance for Loan Losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter end.

·

Other – Ungraded loans. Overdraft protection accounts are typically not graded at origination, but are assigned a risk grade when credit deterioration is detected.